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Treasury & Capital Markets
AEC is no EU in terms of speed
Starting December 31, the 10 member states of Asean (Association of Southeast Asian Nations) will embark on a journey of economic integration. The ultimate aim is to remove the barriers to the free flow of goods, services, investment and skilled labour and freer movement of capital.
Darryl Yu 30 Dec 2015

EU ASEAN Map

Starting December 31, the 10 member states of Asean (Association of Southeast Asian Nations) will embark on a journey of economic integration. The ultimate aim is to remove the barriers to the free flow of goods, services, investment and skilled labour and freer movement of capital.

Encompassing developing Myanmar to cosmopolitan Singapore, the formation of the Asean Economic Community (AEC) represents an interesting counterweight to an Asian region dominated by the economies of China and Japan.

The total combined GDP of Asean in 2014 was around US$2.6 trillion, the third largest in Asia ahead of India, and likely to be close to US$3 trillion by the end of 2015. In terms of foreign investment, the Asean region represented 11% (US$136 billion) of the world’s foreign direct investment (FDI) in 2014.

“The AEC will help make Asean an increasingly attractive production base for internationally-oriented businesses wanting to tap into one of the world’s fast-growing middle class consumer markets, as well as being well-positioned to offer routes into neighboring China and India,” says Paul Skelton, HSBC’s regional head of commercial banking for Asia-Pacific.  

Though the idea of an AEC sounds good in theory, the regional economic bloc still has a long way to go before achieving a liberal model similar to that of the European Union (EU). Indeed, the headwinds that face Asean today, including the low commodity prices and accelerating capital outflow, pose a danger that integration could be delayed even more.

While Asean has no immediate plans to form an EU-style common parliament system and a common currency, the region can learn from the lessons and political will EU leaders had to go through 60 years ago when the European Economic Community (EEC) was formed.

ASEAN Economy  
   

Just like the EU, Asean has its foundations in the Cold War. Founded in 1967 as a counter to the domino effect of communism, the organization had a goal to create a platform for dialogue among neighbours and instill a sense of belonging for member-nations.

Though Asean was formed around the same time as the EU, It wasn’t until the 1990s that the concept of Asean economic cooperation was brought up via the formation of the Asean Free Trade Area (AFTA) between Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand. Under the initial AFTA plan, participants had to commit to reducing tariffs between members and use a common effective preferential tariff scheme for non-Asean members.

By the time the AFTA was finalized, Europe had already established policy changes for developing a single market. While most people would like to see the AEC operate in a similar fashion to the EU, the reality is that Asean is several decades behind Europe in terms regional cooperation. Don’t forget it took Europe almost 20 years to implement the Euro.

Political commitment will be one of the key factors in ensuring the effectiveness of the AEC in 2016. With member states such as Thailand and Myanmar still going through major economic and leadership changes the AEC will need to be patient with the development speed of its members.

As a result of the competitive challenges facing developing Asean countries such as Laos and Cambodia, the AEC postponed required tariffs on intra-regional trade for less developed members till 2018. Countries such as Singapore and the Philippines had already abolished intra-regional trade tariffs in 2010.

Only time will tell if the AEC will be as impactful as the EU was to Europe. With regional schemes such as the Asean funds passport and Growth Triangle (IMT-GT) still looking to gain momentum it is unclear what the future holds for the AEC. One thing for certain is that Asean has the potential to become a significant economic force on the international stage.

With a savings rate of in excess of 32% and a younger population when compared with North Asia, Asean holds the promise of becoming Asia’s next engine of growth. But it will need assiduous hard work before that promise could become a reality.

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